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Published: Thursday, 31 March 2022 23:44
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Income Tax in USA:

There are 2 type of income tax you have to pay in USA.

  • Federal Income Tax: This is a tax that is levied by the central (federal) govt on individual income to all it's residents. You have to file a federal tax return to pay for taxes.
  • State Income tax: This is a tax levied by the respective states on the income of the residents of it's state. This is on top of the federal income tax. State income tax is highest in California at around 14%. It averages around 5%. It's progressive tax, same as federal tax, where marginal tax rate is lower at lower income, and keeps going higher for higher income. This is a good link showing state income tax for all states:
    • Link => https://www.tax-rates.org/taxtables/income-tax-by-state
    • Texas, Florida, Washington, Nevada, Wyoming and Alaska have no state income tax. But they make up for it by levying higher property tax or sales tax. That's still better.
    • You have to file separate tax return for state income to your respective state. This doubles the burden.

We won't talk about state income tax anymore below. Just Federal taxes below.

Federal Income tax:

Tax foundation is a non profit org which has lots of tax related details: https://taxfoundation.org/

Here's the tax history in USA: https://www.investopedia.com/articles/tax/10/concise-history-tax-changes.asp

Historical tax rates: https://taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/

Here's the summarized timeline of Federal Income tax. USA became independent in 1776, and the constitution initially written forbade any direct taxes not levied in proportion to each state's population. Some taxes were still levied from time to time, but The Supreme Court declared a flat tax contained in the 1894 Wilson-Gorman Tariff Act unconstitutional in 1895. The 16th amendment was introduced in 1913 to pave the way to an income tax by removing the proportional to population clause, and this is the time when "Federal Income tax" was officially enacted in 1913. Many of the taxes we pay today were created in the 1920s and 1930s, including the estate tax, gift tax, and Social Security taxes. "Social Security Act of 1935" was passed and started SS tax collection in 1937. In 1920's less than 1% of Americans were paying taxes, but by 1945, 43 Million Americans were paying taxes, with top rates of 94%. Alternative Minimum Tax (AMT) came into existence in 1978. Ronald Reagan, a Republican, became US president in 1981. He drove a lot of tax reforms, and his economic reforms came to be known as "Reaganomics". In years from 1981 thru 1986,There were major changes via "The Economic Recovery Act of 1981". In 1986, another tax reform act lowered the top rate from 50 to 28%, cutting corporate taxes from 50% to 35%. All of this resulted in nearly 1M Americans becoming millionaires for the first time. under President Bush, tax laws were again changed in 2001 resulting in tax cuts and increase in tax credits. The former President Bush tax cuts expired in 2010.

The big change in tax laws came in 2017 via The Tax Cuts and Jobs Act of 2017 (TCJA). TCJA  is a congressional revenue act of the United States signed into law by President Donald Trump which amended the Internal Revenue Code of 1986. TCJA is a temporary change in tax laws applicable for returns filed in 2018 through 2025.  TCJA increased the standard deduction from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint returns, while also eliminating personal exemptions. It also increased the child tax credit from $1K to $2K. The TCJA eliminated or restricted many itemized deductions. In net, it was a wash for a family of 4. 

NOTE: Tax slabs and deductions go up every year based on inflation. They don't require any tax law changes. Tax laws which have to be authorized by Congress  have been changing every few years, and generally change tax rates or deductions allowed.

IRS (Internal Revenue Service) is the government body supposed to collect taxes. You can find all the tax forms, guidelines and all the tax rules on this website. If you ever have a doubt about any tax related stuff, you can call them using the phone number on their website. They will note down your question and someone will get back to you in couple of days with an answer. You should note down the ID of the IRS person, and the data and the time you talked to him, in case there is a dispute later on.

Tax rates for each year: This link is for tax rates for 2024. At the bottom of the page, there are links for previous year's tax rates, deductions, etc. Or you can replace the year in the link to go that year's tax rates.

Tax Return Breakdown:

Firstly, Filing federal taxes in USA are pretty simple compared to taxes in India, if you maintain a simple return. And the taxes are lot lower here in USA than what most people tell you. You pay about 15% in taxes on salary of around $100K as of 2009 !! For year 2022, the same analysis still holds true where you pay 15% tax on salary of around $150K. I've updated tax laws as per the latest updates.

Let's say you are employed here in USA with a company and make $W (or the money that's reported as your salary on pay-stub. This is also the amount reported on your W-2). The company would deduct taxes (estimated taxes based on information you give them) and hand you the remaining money. Actual taxes are calculated when you file the tax return. If you had overpaid taxes, you get a refund.

Tax Free Contributions/deductions:

There are few contributions that you are allowed to make, which lowers your taxable income. Basically these contributions are taken directly out of your paycheck, and you pay $0 tax on it. These are the tax free deductions that you are allowed to make:

  1. Health insurance Premium: If you are in USA, most of the employers pay for your health insurance premium. Health insurance for a family runs at around $15,000/year (for a decent health insurance plan, see in health section for more details), but the employer picks up about 80% of the tab. So, your share of health insurance premium is only 20% or about $3000/yr. This money thankfully is deducted from your income before you pay any taxes. That means your effective taxable income is lower by that amount.
  2. Health Savings Account (HSA): This is a new type of account that is allowed under the High Deductible Health plan. This money is deducted from your income before you pay any taxes.
  3. AD&D Coverage: Next if you signed for any AD&D coverage (which basically covers you and your family incase of an accident, this is different than life insurance), the premium that you paid for AD&D coverage is also deducted from your income before you pay any taxes.
  4. Flexible spending health (FSA): FSA accounts are additional accounts for Dental/Vision plans that you can setup at your employer. This is totally optional. The money that you put in this account is once again deducted from your income before you pay any taxes.

For all above Health Insurance Plans and Accounts, look in the "Health Insurance section". So, to summarize:

  • Your Salary = $W
    • Health Insurance Premium paid by you = $A
    • HSA money contributed by you and deducted from your salary = $B
    • AD&D Premium paid by you = $C
    • FSA money contributed by you and deducted from your salary = $D
  • So, your taxable income ($TI) = $W - $A - $B - $C - $D

This taxable income is what is reported as medicare wages (item 5 on W-2). Now start's your taxes on this taxable income $TI.

SS and Medicare taxes:

These are taxes that everyone pays irrespective of their income. These are automatically deducted out of your paycheck, so you don't need to file for them in your Federal income tax return. Look under "social security benefits" section for more details on these.

  • Social Security taxes: Firstly you have to pay Social Security taxes on your taxable income. It's 6.2% of your salary. It's applied only on the first $110K of your salary (for year 2009). So, the maximum Social Security taxes that you can pay is $7K or so. Remember that social security taxes are actually 12.4%, but these are divided equally between the employer and the employee. So, if your employed, your employer pays the other 6.2% of your salary to the IRS. Note, that if you were self employed, you would have to pay the total 12.4% tax out of your own pocket. So, govt penalizes for being self employed !! The amount of $TI that is subject to SSN tax is reported as social security wages (item 3 on 2009 W-2). This is equal to max of $TI and $110K. Every year, the limit on which SS tax is applied goes up so that 6% of eligible taxpayers pay the maximum SS tax. As of 2022, the max SS tax is $147K
  • Medicare Taxes: Next you have to pay Medicare taxes on your taxable income. It's 1.45% of your salary. There's no upper limit on this (unlike social security taxes), so you have to pay this tax on all of your taxable income. Once again like the social security taxes, Medicare taxes are 2.9%, but these are divided equally between the employer and the employee. So, if your employed, your employer pays the other 1.45% of your salary to the IRS. Note, that if you were self employed, you would have to pay the total 2.9% tax out of your own pocket. Again this is like a penalty for being self employed !! The amount of $TI that is subject to Medicare tax is reported as medicare wages (item 5 on 2009 W-2). This is equal to $TI.
    • UPDATE 2013: Two additional Medicare taxes were added via the Affordable Care Act (ACA) in 2013. First was the "Additional medicare tax" of 0.9% which was levied on W2 wages of > $200K for individuals and > $250K for married filing jointly. This was only levied on employee and NOT the employer. The second was the the net investment income tax, also known as the “unearned income Medicare contribution surtax,” which is an additional 3.8% tax applied to net investment income above $250K (for married filing jointly) . Like the additional Medicare tax, there is no employer-paid portion.

Remember that there's nothing you can do to lower your social security and the medicare taxes. These are taken out of your salary directly, and you are not supposed to be concerned about these when you file your federal taxes or state taxes. No deduction, credits, etc applies to these taxes.However, if somehow (because of job change, etc) you paid more than the max amount required in SSN taxes, you can claim a refund when filing taxes.

So, your salary after paying these taxes is:

  • Effective salary = $TI - 0.062*$TI (max of around $7K for yr 2009, or $9K for 2022) - 0.0145*$TI.
    • If you are making less than $110K, your effective salary is = 0.9235*$TI.
    • If you are making more than $110K, your effective salary is = 0.9855*$TI - $(max_ss_tax).

401K Retirement Contributions:

If you contribute any money in 401K retirement plan, you don't have to pay any federal taxes on that amount of money. Effectively, your salary is lowered by that amount before you pay any federal taxes. Look in the 401K section to see how much you should be contributing to your 401K. There's a yearly limit on how much can you conribute to 401K. As of 2022, the limit is about $20K per year.

So, your new effective salary subject to federal taxes is ($W0) = $TI - 401K_contribution.

This effective salary ($W0) is what is reported as your wages on W-2 (item 1 on W-2). This is also what you report as your wages on federal income tax return (item 7 on form 1040 in year 2009 tax forms).

NOTE: We pay SS and Medicare taxes on the 401K retirement contribution. The only tax we get sparred from is the Federal income tax. So, 401K contribution is not treated the same way as other contributions like your HSA/FSA contribution. Many folks are misguided that they pay no taxes on your 401K contribution, which isn't true. You always pay SSN+Medicare taxes on 401K contributions.

AGI and Taxes:

Now with all these contributions out of way, we came to effective salary. This effective salary $W0 is what is subject to federal and state taxes. This is the place where you can save a lot by taking advantage of tax breaks. Let's start with your AGI:

On top of $W0 (item 1 on W-2 form) being reported above, you may also have other income ($OI). This other income might be interest income from fixed deposits, income from stocks, dividends from stocks, real estate rental income or any other income from any source. Now all of this other income ($OI) is added to $W0 to get your Adjusted gross income (AGI).

  • $AGI = $W0 + $OI

Remember this AGI is the most important number on your income tax return. This AGI decides entirely what federal taxes you are going to pay. All the statistics on IRS website or elsewhere are based on this AGI number. Most of the tax credits, deductions, etc are based on AGI, so you want to keep this number low. If your AGI is > $400K (as of 2022 for married filing jointly(), you may lose a lot of freebies allowed by the tax laws :(. So, try to keep AGI below 400K, or Wages and other income to less than half a million dollars.

NOTE: You pay social security and Medicare taxes only on your wages (Box 1, 3 or 5 of your W-2), and NOT on any other income ($OI) which is interest income, stock or home sale profit etc. For interest income, many banks/brokerage choose to report bonus income, referral, credit card rewards, etc as Miscellaneous income while others choose to report it as plain interest income or not report at all. That has tax consequences. Head to "Bank Account" section under Finance for more details.

HSA contribution: One other item that affects AGI is your HSA (health savings account). It's indicated as $B above. With the Obama Healthcare reform in 2013, more and more employers switching to High deductible healthcare plan (HDHP). As of 2022, most of the employees have switched to HDHP plans. Look in health insurance section for more details. The money that you and your employer contribute towards an HSA is reported on box 12 of W-2 form, with a code W. The employer portion of this amount (usually $1K for family HDHP) is not included in your wages, and as such you never paid any tax on that amount. However, the employee portion of this amount is included in your wages and is going to be taxed, so you'll have to include this amount in your tax return, in order to claim deduction for your share of contribution to HSA. Entering this amount on your tax form, reduces your AGI by an equivalent amount. So, final AGI = above AGI - HSA contribution by employee. SS and Medicare taxes aren't levied on this HSA contribution, it's just the federal taxes that get confusing.

Estimated Federal taxes are calculated on AGI and what you get in hand is after deducting these estimated federal taxes from AGI. These are called taxes withheld at source.

Now, when you file your yearly income tax return, you can calculate your total taxes. Depending on whether your actual taxes calculated are more or less than the taxes withheld, you may owe money to IRS or get a refund from IRS. Let's walk through the federal tax calculation process starting with AGI:

Deductions:

Deductions are the provision in ta law, which allow you to reduce your taxable income by a given amount, so that you don't have to pay any federal income tax on that amount. This is to help 95% of the people in bringing down their taxes. Deductions are applied before calculating Federal income taxes. Below are the most common deductions that almost everyone is eligible for.

  1. Standard Deduction: You are entitled for a standard deduction of $SD ( for year 2009). This standard deduction basically means that you don't pay any federal taxes on this amount of money, and you can subtract this amount from your AGI.
    • Year 2009: SD is approx $5700 for single filers and $11,400 for married filing jointly
    • Year 2018-2025: As per TCJA of 2017, SD has been doubled. For year 2022, SD is approx $12950 for single filers and $25,900 for married filing jointly
    • Year 2026 onwards: As per new tax law "one big beautiful bill" signed on July 4, 2025, many changes have been made permanent. All of these changes apply from tax year 2026 and beyond, so 2025 taxes still follow the TCJA rules. Few of such changes applicable from 2026 are as below:
  2. Itemized deductions: In case you don't want to take standard deduction, you have an alternate choice of taking "itemized deduction". Itemized deduction allows you to add deductions allowed by tax laws, and come up with total deduction amount. If your "itemized deduction" amount comes out to be more than "standard deduction" amount, then you should take itemized deduction. However, "itemized deduction" carry more scrutiny by IRS, so I usually go with standard deduction if the 2 amounts are close to each other. Some of the deductions that can be itemized are:
    • Year 2018-2025: As per TCJA of 2017, itemized deductions were greatly reduced. In parallel, std deduction amount was raised. Effectively, this made itemizing deductions a less appealing choice for most of the tax payers in the bottom 90% taxpayers. Biggest items for itemizing are:
    • Years except above: Itemized deductions allowed were more generous, and so a,lot of people opted for this.
    • Common deductions allowed under "itemizing" are:
      1. Mortgage Interest: If you own your house, and pay mortgage on it, then you can deduct the interest payment portion of it.
      2. Property tax: If you paid property tax for your house, you can deduct it here. Most states have property tax of around 1% of the value of house, but states with no state income tax, have property tax as high as 3.5% of the value of the house. This can easily get to $20K-$30K in property taxes. Before TCJA of 2017, all of the property tax was deductible, but now,it's subject to a max amount of $10K, even if you paid more than that.
        • Year 2008: There was one year in 2008 where you could have claimed a deduction of $1000 for property taxes paid on your home in the year 2008 (if you own a home and you paid over $1000 in property taxes. If you paid less than $1000 in property taxes, you can deduct only up to the amount of taxes paid). This was allowed for people filing standard deduction, so everyone got some tax saving. This was to help taxpayers mired in the financial depression of 2008-2009.
      3. Charity contribution: You are allowed to deduct charity contributions up to a limit. No receipts are needed.
        1. For 2026 tax year onwards, as per new tax law "one big beautiful bill", charity contributions for first 0.5% of your AGI are excluded from deduction. Basically, you are better off filing as std deduction for charity contributions. You get most of the benefit. See above under std deduction. 
      4. State income tax: If you paid state income tax, you can deduct that amount here
      5. State sales tax: There is a calculator on IRS site that allows you to claim a "standard sales tax" deduction based on the state you live in. You can use this amount, or you can use your own amount that you spent on buying things. It's better to stick with "standard sales tax" amount, as that is very generous, and you don't need any receipts for that.
  3. Personal Exemption: You are also entitled for a Personal exemption and one additional exemption for each of the dependents (For years before 2018 and after 2025). Each exemption was approx $3650 as of 2009. If you are married filing jointly, you get exemption of 2*$3650 = $7300 (one for you and one for your wife). Your children, parents and almost anyone qualifies to be your dependent for whom you pay majority of the expenses, and who aren't filing their own tax return, and aren't claimed as dependents on anyone else tax return (as that would imply double exemption for same person, not allowed). So, for a family of 4, it would be $14,600 (for year 2009)
    • Year 2018-2025: As per TCJA of 2017, Personal exemption has been eliminated. If Personal exemption and SD were both same as before the cuts, SD would be about $25900/2, and Personal exemption would be about $4K, so sum of the two for a family of 4 would be about $13K+$4K*4=$29K. So, TCJA resulted in loss of about $3K in tax deductions for a family of 4. However, later we'll see that child credits were doubled, getting us to a breakeven point compared to before TCJA.

The exemptions listed above are always there (with exception of personal exemption from 2018-2025), though their amount varies each year. Any additional deductions are for certain years only, but are listed above for completeness.

So, your taxable income subject to tax after these deductions is ($TIT) = AGI - Std_deduction - Exemption*number of dependents - Any_other_exemptions.

Now, we need to calculate taxes on $TI (taxable Income or item 43 on form 1040 for year 2009). In US, there are marginal tax rates, implying you pay a higher tax rate for higher income. Tax rates start from ~10% for lower income, and goes as high as 40% for higher income. You can look at sample tax rates for 2009 by going to IRS website. Here's a quick summary:

  • you pay 10% on income between $0 and $C1 (For single person $C1 is around $10K, for married person filing jointly $C1 is doubled)
  • you pay 15% on income between $C1 and $C2 (For single person $C2 is around $35K, for married person filing jointly $C2 is doubled)
  • you pay 25% on income between $C2 and $C3 (For single person $C3 is around $85K, for married person filing jointly $C3 is $150K)
  • you pay 28% on income between $C3 and $C4 (For single person $C4 is around $170K, for married person filing jointly $C4 is $220K)
  • you pay 33% on income between $C4 and $C5 (For single person or married filing jointly $C5 is around $370K for both)
  • you pay 35% on income over $C5 (Top tax bracket range is 35%)

As you can see that income threshold for higher taxes are doubled for married people for income < $150K. This is so that people in middle class (those typically making < $250K) don't get penalized for being married, where only 1 spouse is working. However for higher income, married people don't get any advantage.

So, net tax payable ($NT) = tax_rate*$TIT (tax rate will apply different to different portions of your income as it's marginal progressive tax rate)

Credits:

Once you calculate your taxes using the tax rate table, you can now start claiming credits on your tax. Remember, credits are different than deductions. Deductions as mentioned above only lower your taxable income by that amount, so you are only saving on tax that would have paid on that income. Credits in contrast lower your tax bill by the credit amount. For Ex, suppose your net taxable income is $10K, and you are paying tax of $1K (assuming 10% tax rate) on this. If you are allowed to take an additional deduction of $1K, this will lower your taxable income to $9K, and so you will be paying a tax of $900 now (assuming 10% tax rate). That's a savings of $100. Now on the contrary assume that you are allowed to take a credit of $1000. Then, you subtract $1000 from the tax of $1K and you are left with $0 in taxes. So, credits are much more beneficial than deductions.

Few of the credits that are more commonly used. Note these credits vary widely from year to year.

  1. Child credit: For every child you have, you can take some credit provided the child is under a certain age limit and satisfies certain other requirements. a credit of $1000. This is on top of the personal exemption that you can claim for your child. So, for a person in 15% tax bracket range, this is like a total of around $1500 that you get per child from the government.
  2. Earned Income Credit, Make work Pay credit, Education credit, etc ...

So, final tax payable ($FT) = $NT - all_credits

 

 

Final Taxes:

Year 2009:

So, let's take an example of a person making $110K, married filing jointly and having 2 kids, and filing taxes for year 2009. We chose $110K, since for any salary upto $110K, a tax filer is able to get advantage of most of the credits/deductions, and still falls under 15% tax bracket. His final tax is as follows:

  • Taxable wage for Social security and Medicare = $110K - $3K (health insurance premium) - $1K (FSA contribution) = $106K. This is your AGI.
  • SS and Medicare tax (collectively known as FICA tax) = $106K*0.0765 = $8.1K.
  • If you are enrolled in HDHP instead of regular co-pay plan, then you can deduct your HSA contribution, to lower down your AGI. So, if you contributed let's say $5K in HSA, your AGI will be $101K. Note, that you have to pay SSN and medicare tax on this HSA contribution of $5K. Look in health insurance section for details about HSA.

Taxable wage for Federal Tax = $106K - $12K (401K contribution of $7K + HSA contribution of $5K) = $94K
Federal taxable wage after deductions = $94K - $12K (standard deduction) - $14K ($3.5K *4 as 4 dependents) = $68K

Federal Tax = $9.6K (approx based on 15% tax rate on $68K)
Credits = $2K for two kids
Net tax to be paid = $9.6K - $2K = $7.6K

State Tax = varies depending on state

So, net tax = $7.3K (SS/Medicare) + $7.6K (regular) = $14.9K (assuming no state tax)
As a percentage of your income, your net tax is less than 15% on your total wage (for a married couple with 2 children for year 2009). That's a pretty low tax rate on a salary of $110K.

Year 2022:

So, let's take an example of a person making $150K, married filing jointly and having 2 kids, and filing taxes for year 2022. We chose $150K for 2 reasons: Firstly a salary of $110K in 2009 would  easily be $150, since for any salary up to $110K, a tax filer is able to get advantage of most of the credits/deductions, and still falls under 15% tax bracket. His final tax is as follows:

  • Taxable wage for Social security and Medicare = $110K - $3K (health insurance premium) - $1K (FSA contribution) = $106K. This is your AGI.
  • SS and Medicare tax (collectively known as FICA tax) = $106K*0.0765 = $8.1K.
  • If you are enrolled in HDHP instead of regular co-pay plan, then you can deduct your HSA contribution, to lower down your AGI. So, if you contributed let's say $5K in HSA, your AGI will be $101K. Note, that you have to pay SSN and medicare tax on this HSA contribution of $5K. Look in health insurance section for details about HSA.

Taxable wage for Federal Tax = $106K - $12K (401K contribution of $7K + HSA contribution of $5K) = $94K
Federal taxable wage after deductions = $94K - $12K (standard deduction) - $14K ($3.5K *4 as 4 dependents) = $68K

Federal Tax = $9.6K (approx based on tax rate on $68K)
Credits = $2K for two kids
Net tax to be paid = $9.6K - $2K = $7.6K

State Tax = varies depending on state

So, net tax = $7.3K + $7.6K = $14.9K (assuming no state tax)
As a percentage of your income, your net tax is less than 15% on your total wage (for a married couple with 2 children for year 2009). That's a pretty low tax rate on a salary of $110K.

 

 

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Published: Wednesday, 23 March 2022 18:55
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Enjoy :-))))

 

You don't know shit:

A guy was seated next to a 10-year-old girl on an airplane. Being bored, he turned to the girl and said, "Let's talk. I've heard that flights go quicker if you strike up a conversation with your fellow passenger."

The girl, who was reading a book, closed it slowly and said to the guy, "What would you like to talk about?"

Oh, I don't know," said the guy. "How about nuclear power?"

"OK," she said. "That could be an interesting topic. But let me ask you a question first. A horse, a cow and a deer all eat the same stuff... grass. Yet a deer excretes little pellets, while a cow turns out a flat patty, and a horse produces clumps of dried grass. Why do you suppose that is?"

The guy thought about it and said, "Hmmm, I have no idea."

To which the girl replied, "Do you really feel qualified to discuss nuclear power when you don't know shit?"

Idiots in classroom:

"If there are any idiots in the room, will they please stand up" said the sarcastic teacher.

After a long silence, one student rose to her feet.

"Now then young lady, why do you consider yourself an idiot?" inquired the teacher with a sneer.

"Well, actually I don't," said the student, "but I hate to see you standing up there all by yourself."

Relatives:

My father would have used one of his favorite jokes to explain the situation.

A husband and wife were driving down the countryside and came across a farm filled with pigs, donkeys and mules.

The husband pointed to them and said to his wife, “Your relatives.”

Without missing a beat, she said, “Yes. In-laws.”

 Forgiveness:

One Sunday in church, Pastor's sermon was about forgiveness. He asked everyone in the church to stand up. Then he asked those who had any enemies to sit down. Everyone sat down but one very old woman.

"You have no enemies at all?" asked Pastor.

"Not a single one," she answered, nodding her agreement.

"Please, come up here and tell everyone how you reached such a great age without having any enemies," said Pastor. A deacon accompanied the elderly woman to the pulpit and everyone in church applauded as she slowly made her way up the steps. Pastor adjusted the microphone.

"You must have done a lot of forgiving," said Pastor. "Please, tell us your secret."

The old lady smiled beatifically.

"I outlived the bitches," she said.

 

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Published: Wednesday, 09 February 2022 01:33
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Flights:

There are many Airlines both domestic and international that you can take from USA to any other place in the world. Some airlines are most effective for flying within USA, while others are cheaper when flying internationally. It's a non solvable problem on how to find the cheapest flights to anywhere. One of the sites that comes closest to helping you is www.google.com/flights. Here you can put in your dates and it will show you the whole monthly grid for all departure and arrival dates. It doesn't allow you to book from their site, but gives you instructions on where to go to book at the price they are showing you. I've used google flights website almost exclusively to find best deals on flights. you can also just explore a country or just explore to find cheapest flights to anywhere. A lot of neat info.

Few tips when booking flight tickets:

  • Book Directly: Always book directly from the airline website (i.e www.delta.com, www.klm.com, etc). That way you deal directly with the Airlines company. Also, as a sided bonus, you have 24 hours to cancel any flight and get full refund. This is by law of USA, and no Airline can deny that. IF you book via a travel agent, then this protection still applies, but travel agents may charge a service fee, etc.
  • NO OTA: Never book from travel companies or  3rd party reseller websites (OTA or Online Travel Aggregator) (i.e www.expedia.com, www.cheapoair.com, etc) for reasons mentioned above. These middle men companies basically butcher you when you try to modify or cancel an existing reservation. They will try to sell you tickets $5-$10 cheaper (by using coupons when you book your ticket the very first time) than booking directly from the airlines, but it's not worth it.
  • No Insurance: Never buy insurance or higher priced tickets which provide you protection in case your flights get cancelled or your plans change. Such insurance costs a lot of money. It's usually cheaper to call the airlines directly, and pay a little money ($100 or so along with the fare difference) and get the tickets modified.
  • Use Good Credit Card: Always book airlines tickets with a credit card that provides full protection incase you aren't satisfied with your purchase. A credit card like "Chase" has always covered me in case airlines refused to refund.
  • Fly off season: When you fly off season, you can fly for so much cheaper than when you fly during holiday season. For USA, peak prices are in November around ThanksGiving, in December round Christmas, during summer (from late May to Mid August), during spring break (mid March) and during long weekends (.e when it's aholiday on Fridy or Monday, giving you a 3 day weekend). These high priced dates very much coincide with when schools are off in those cities. Whenever Kids schools are having a holiday, prices go up significantly, as everyone wants to use Kids holidays to travel. In USA, school attendance is mandatory, and kids can't skip schools for more than 10 days or so in the whole year (unless accompanied by a doctor's note). So, everyone schedule their travel plans around Kid's holidays. Best to avoid those times. If you do have to travel uring these holidays or peak travel time, try to drive to that place and choose a place within driving distance. That way you don't have to cough up 10X the price for flight tickets. You will still be paying higher for hotels or lodging.
  • Single Reservation Code: Always book flights which are all under a single reservation code. What I mean is that if there's a layover or a stop in between your flight, then all segments of your flight should all be booked under a single code. This will automatically happen if you book your ticket directly with airlines, so it's not an issue there. However, if you book tickets thru OTA, then they may sometimes book your tickets separately for each segment of your flight. If you are traveling internationally, those tickets may not even be valid, and you may not even be allowed to board the plane. It's very important to note this, as there will be no refund and no alternate flight to take.
  • Beware of Scam: Google flights will list a lot of legal scam OTA in their search. I've fallen prey to these, and never thought that companies like google will allow scammers to be in their search results. Reviews are all over the internet, on how these scam companies never refund any money, nor have any customer service. By the time you file dispute with your credit card, it's already beyond 60 days, so you are out of luck. Some of such OTA:
    • Kiwi => www.kiwi.com : => This is one of the scam companies that shows up in top search results. They provide cheaper flights, the only catch is you won't have any flights.
    • Flight Network => www.flightnetwork.com : => This is another of those scam companies, that I've been a victim of. They literally disappear after taking the money. I got flight cancellation emails, no customer service to talk to. Thanks to "chase dispute provision" on their credit card, I was able to dispute the charge and get all of it back. I was lucky as my flight was within 60 days, so I found out.
    • FlightHub => https://www.flighthub.com : => This scammer shows up in search results from Kayak, as well as few other scam companies. Their prices will always be few hundred dollars cheaper, but your tickets may get cancelled, or may turn out to be fake. On top of that, they will charge you for multiple insurance. You have to keep on watching your credit card for every charge from them, as mot of them will be bogus charges.

 

 

Government Mandated rules for USA flights:

 

 

Domestic Flights in USA:

These are few airlines which are really cheap for flying domestic:

  • Spirit / JetBlue Airlines: These used to be separate companies, but announced merger in 2022. These are one of the cheapest airlines as you can make a roundtrip within USA for < $100. However, they allow only 1 carry on and no checkin for free. Even the carry on can't be anything larger than a backpack that should fit under the seat in front of you. If it doesn't look like backpack or small enough size, they will charge you for extra luggage. Every extra luggage costs you more than the price of the ticket itself. They nickel and dime for everything, but that's just because they are so cheap. If you have kids or luggage, then these airlines are NOT for you. Nevertheless, you should always check the fares on these airlines before you book anywhere else. Jetblue used to have "All you can Jet" sales in between 2010-2020, where you could buy an unlimited pass for $500 or o for 30 days, and then fly anywhere to anywhere within USA as many times as you wanted within those 30 days (i.e like a flight buffet for 30 days). They don't offer these anymore (at least I haven't seen any such promo since 2020). Best to avoid this airline unless you are desperate.
  • Frontier Airlines: They tried to merge with Spirit, but that deal didn't go thru. Now, Frontier is the only other low cost airline. Their fares, service, etc are similar to Spirit Airlines. They too nickel and dime for everything, so best to avoid. They also have also started "All you can fly pass" wich is as useless as their airline.
  • Southwest Airlines: Southwest is one of the best airlines with the best service. (UPDATE 2025: A lot has been changing since 2024, and SW may be not much better than Spirit/Frontier, etc. So, check before you fly.) They charge you more, but they often have sales going on. Most of the times in off season, you can find flights for $100-$150 roundtrip in USA. They allow 2 checkins and 1 carryon for no extra charge (UPDATE Mar, 2025: No more free checkins. See below ). You can change flights without incurring any fees, though those new vouchers will expire within a year (southwest updated their policy as of July 2022, where these credits won't ever expire, so excellent deal for consumers. UPDATE 2025: vouchers and credits will expire within 6 months. See below). They also have few international destinations in Central and South America, here you can get great prices during off season sales. Check their website for all destinations. Their Giftcards are usually on 10% sale at Costco and Sams club. You can load up as many as you want, so it's effectively 10% discount on your tickets. Sometimes during Thanksgiving, memorial day, or random times of year they have 15%-25% sale off these GC. That is the only time that I try to pick these GC. Booking Southwest flights with credit card gives no additional advantage, as southwest anyway allows you to change flights for free. So, buy these GC in advance, if you anticipate a flight in near future (taxes + fees can be paid using GC too. Only caveat is you can use a max of 3 GC per passenger, and max 3 forms of payment, so you may need to use other form of payment as credit card. Southwest airlines is not included in any search result on internet, so you don't really see them listed on any travel portal website I don't know of any way to look up prices of southwest flights, except by going directly to southwest.com. (UPDATE: May 2024: They are now included in google.com/flights and shows up in their search too, but booking has to be done via southwest.com).
    • LATEST UPDATES (Sept, 2025):
    • Southwest GC on sale:
    • SW GC can't be used for:
      • EarlyBird Check-In 
      • Pet Fares 
      • Unaccompanied Minor fees 
      • Southwest Vacations Packages 
      • Cargo 
      • Hotel 
      • Rental car 
      • Southwest Airlines merchandise 
      • Oversized, overweight, and excess baggage fees 
      • Upgraded Boarding at the airport
    • Southwest Rapid Rewards (RR) membership: I would recommend to become a rapid rewards member. It's free to sign up. Few advantages of RR membership:
      • All your credits, vouchers can be stored in your account, otherwise the credits/vouchers remain attached to the reservation number, and it's hard to retrieve them in case you don't remember your old reservation number. You have to search thru countless emails.
      • You also get points for every flight you take. You earn points @ 6 points/dollar spent => 6% cashback for cheapest "Wanna Get away fares". For more expensive class, you earn 8, 10 or 12 points per dollar. Points are valued at around 1.3-1.4 cents per point. So, effectively you are getting around 10% cashback. That means for every 10 flights taken, you may earn 1 free flight. You can also get points by making other non-airline purchases. This 10% cashback is pretty generous, as even other big airlines give you 15% cash back at best (UPDATE Mar, 2025. Points have been devalued to 2 points/dollar, basically points are useless now => https://www.doctorofcredit.com/southwest-cuts-earning-rates-on-wanna-get-away-fares-6-2/).
      • You can also buy points if you are running short on them. They sell points for 3 cents per point. Many times they have sale on points, where you can buy them for 1.5 cents per point. One such sale is here: https://onemileatatime.com/deals/buy-southwest-rapid-rewards-points/
    • Southwest Vouchers: You get Vouchers from SW when they delay flights, cancel flights or for any other reason. These usually expire within a year. The trick to stop them from expiring is to use them to book any flight for that amount or slightly over the voucher amount. Use the Vouchers to pay for it, and then cancel the tickets immediately. Then you'll get the refund as flight credits which never expire (as per updated rules from 2022). You don't lose anything in the process, and can effectively use the credits anytme in future.
    •  Southwest flight search: If you are looking for lowest fares to all cities in USA from a particular city, there's a direct link where it shows this. I use this often to plan random trip to places, when it's going for < $100 roundtrip.
  • American Airlines, United, Delta and Misc: All these airlines also provide a lot of domestic flights, but their prices vary a lot. Also, their cheaper flight options have same kind of restrictions on luggage as Spirit/Frontier, etc (i.e allowing only a backpack for free, no refunds, etc).  Usually you will be able to find same iterinery flights for little bit more at Southwest. So, it's best to go with Southwest as it gives you much better value in terms of price and flexibility (i.e free cancellations, points, 2 baggage for free, etc).

 

 

International Flights from USA:

For International flights, there's no single option. Off season, you may get crazy deals for flying to the other side of the globe for $700 (i.e India, Thailand, etc), or $200 for flying to Europe. Many travel companies offer decent packages for traveling to other countries which include hotels, flights as well as entrance tickets to many of the attractions. Groupon is usually a good place to start your search for such vacation packages. Few good airlines to fly to India are KLM, Delta, Emirates, Qatar, Lufthansa, British Airways, etc.

  •  International destinations: Destinations like Cuba, Puerto Rico, Mexico, etc have deals from time to time where you can get flight tickets for < $200 roundtrip on AA, delta, etc. Look for those in google.com/flights.

Links for some cheap flights:

Slickdeals link is one of the best places to see if there's anything being given out for cheap. Of course they are from a specific city to anther specific city, so this is mostly for people who are just looking to go anywhere anytime.

https://slickdeals.net/travel-deals/

 Few such deals:

 

 

GC DEALS:

 

Southwest $500 GC deals on costco.com and samsclub.com :

On reddit: Apparently people are selling SW on reddit for less than 75%, i.e $500 SW credit selling for < $375 (Google “reddit gift card exchange). Not sure how safe is it??

Southwest GC deal for 10% off is always valid at these 2 discount stores. Deals for > 10% come few times a year. During Thanksgiving, Christmas, you may get the GC for 14% off. Sams club had it for $400 on 2023 BF deal. Costco's lowest had been $420. $430 is the more common one, so buy it at that price. If you bought the GC for a higher price from costco and are within 30 day window, see costco in the "stores" section for a price match. It's hit or miss, but worth the try. Costco also gives 2% cashback for being a executive member on everything, so essentially you are getting $500 GC for $420. Below are the deals:

 

 

 

2025:

 

 

05/12/2025: Cheap ticket from USA to India = $494 from SFO to Mumbai

Roundtrip from San Francisco to Mumbai, India on Delta/KLM for $500 for travel in 2025 (Selected dates only). Similar to earlier deals from 2022 and 2023. However, this is insanely cheap, with Airlines losing money. If you are near SFO area, definitely book it, as it seems to be a price mistake, and will go away any time soon. I can't take advantage of this deal, so bad :(

https://slickdeals.net/f/18309850-rt-san-francisco-to-mumbai-india-494-airfares-on-virgin-atlantic-or-lufthansa-with-1-free-checked-bag-travel-september-november-2025

 

 

 

2024:

 

,

03/09/2024: Southwest $500 GC for $430 on costco.com : expires 03/10/2024 

Same deal as last time on costco.

https://slickdeals.net/f/17342835-southwest-airlines-500-e-gift-card-430-from-costco

 

 

 

2023:

 

 

,

05/27/2023: Southwest $500 GC for $430 on costco.com : expires 05/28/2023 

Same deal as last time on costco.

https://www.doctorofcredit.com/costco-com-500-southwest-egiftcard-for-429-99-limit-2/

 

 

04/12/2023: Cheap ticket from USA to India 

Roundtrip from New York to New Delhi, India on American Airlines for $650 for travel in Feb 2023. Similar to  a deal from 2022 from San Francisco to New Delhi on Singapore Airlines.

https://slickdeals.net/f/16571627-american-airlines-round-trip-nonstop-flight-from-new-york-ny-to-new-delhi-india-648-travel-february-2024-select-dates?src=frontpage

 

,

03/14/2023: Southwest: 20% Off Points Bookings With Promo Code SAVE20NOW => expires 03/16/2023

You get 20% off when booking with points, when traveling by May 24, 2023. Cancel and re book for existing flights, if fares are the same or lower.

https://www.doctorofcredit.com/southwest-20-off-points-bookings-with-promo-code-save20now/

 

,

03/03/2023: Southwest $500 GC for $430 on costco.com : expires 03/05/2023 

Usually these GC go for $450, so you are getting extra $20 or extra 4% discount. Limit 2 per account. If you are frequent SW traveler and traveling in next few months, you may want to haord up. Otherwise not worth it, as that $500 is anyway yielding 5% yearly in bank accounts, so extra 4% is more or less a washout.

https://www.doctorofcredit.com/costco-com-500-southwest-egiftcard-for-429-99-limit-2/

 

 

 

2022:

 

 

,

10/26/2022: Frontier Airlines launches "all you can Fly": 

Frontier Airlines  announced "all you can fly" pass similar to what we had seen for JetBlue. But this is 1 year pass compared to 1 month pass for JetBlue. Details are unknown, but might be a good deal who can take off from work during weekdays.

https://www.doctorofcredit.com/frontier-to-launch-all-you-can-fly-gowild-pass/

UPDATE: One important detail that I found id that flight is only confirmed a day before departure, so basically you are on standby all the time on all the flights. So, basically renders this pass useless for any trip, as you can't plan anything, and risk getting stuck in a foreign city with unlimited expenses.

 

,

09/26/2022: Few cheap air tickets to Europe from USA: 

Jan-Mar of any year is very low on air travel, and so deals abound. Here are few:

Roundtrip Newark, New Jersey to Barcelona, Spain for $300:

https://slickdeals.net/f/16047343-roundtrip-flight-newark-nj-ewr-to-barcelona-spain-bcn-298-travel-january-may-2023?src=frontpage

 

 

09/08/2022: Cheap ticket from USA to India 

Roundtrip San Franciso, California to New Delhi, India on Singapore Airlines for $700 for travel between March 2023 to May 2023:

https://slickdeals.net/f/16058476-san-francisco-to-new-delhi-india-687-rt-airfares-on-5-singapore-airlines-with-2-free-checked-bags-flexible-ticket-travel-march-may-2023

 

 

09/07/2022: Free Companion ticket when booking with Southwest: Expires 09/08/2022 

This offer comes about 1-2 times a year. You get a free companion pass for traveling between 4th Jan, 2023 and 4th Mar, 2023. However, you need to book your current flight by 8th September, 2022 for travel by 17th November, 2022, in order to get the companion pass. Companion pass will be issued on Jan 4th, 2023, so you can book your 2023 flight only after that date.

https://www.doctorofcredit.com/southwest-get-2-months-companion-pass-when-you-fly-once-by-11-17-22/

 

 

 

Details
Published: Friday, 28 January 2022 16:27
Hits: 1820

Cash to keep:

Usually you do not want to leave much cash in your brokerage account, as they pay you close to 0% in interest rate. However, it's prudent to keep some cash just so that you don't have to ever sell any stock under any circumstances. Cash doesn't need to earn 0%. You can either invest your cash in Bonds (which may lose value) or keep it in some CD or money fund (which won't lose value). These Bond, CD and money market investment are only supposed to be short term, to reduce the bleeding of money (they still lose money compared to inflation, but may be little better than cash). You can buy them just like stocks in a brokerage account.

Below we'll talk about both Bonds and Money market funds. We'll also mention Brokered CD, though more details about CD are in CD section of "Banks".

Here's link explaining various options: https://www.doctorofcredit.com/brokerage-money-market-bond-funds-as-savings-account-alternatives/

TAXES:

You always have to pay Federal income tax as per your tax slab for any interest income. That interest may come from money in banks, money market, bonds, CD, etc. There is one exception to this - Municipal bonds carry no Federal income taxes. However, the interest on these municipal bonds is much lower than what you get on other kind of Bonds. So, for most of the people the saving on federal tax isn't worthwhile. 

However, you may be able to save state income taxes on some of these interest income securities (assuming you live in a state that charges state income tax). This is true for US Treasury bonds, I-Bonds, Federal money market funds, Municipal bonds, etc. In short, anywhere you lend money to Federal, State or local Government, you may be able to save on State income taxes. More details on DoC link below.

Link on DoC: https://www.doctorofcredit.com/savings-taxes-on-earnings-from-high-yield-savings-accounts/

 

 

 

A. Bonds:

We talked about stocks, and how we should always be "invested" in stock ponzi scheme. We also talked about banks, and how we can park our money there in Savings/Checking accounts to get few cents in interest every month. Or if we are looking to get more than few cents, we could get a CD, which locks our money for multiple months to multiple years.

One more thing that we can invest in is loaning our money to public companies and government. Lending to public or private companies is risky, as they may go bankrupt, and we may never see our principle back. Lending to government is less risky, as the government has power to print money, and hence can always pay the money back. Loaning money this way is done via "bonds". Bonds are just like stocks, except that you are in the front line of creditors, if the company goes bankrupt. In stocks, you get back nothing if the company goes bankrupt. But with bonds, you may get something back depending on whatever is left over after liquidating the assets and paying other higher priority creditors. Bonds trade on the stock market just like stocks, their prices change every second. But you do get monthly or quarterly or half yearly interest payment.

Bonds are a good way to get higher interest than your bank will give. As of end of 2021, bonds for public companies were yielding 2% for 10 year investment grade bonds.  Government bonds were were yielding even less than that. The rate is abysmal to start with. There's also a risk of losing money in the bond. You may think of Bonds as a CD, where you lock your money for couple of years. If you take out money before then, you may be charged a pre withdrawal penalty (since for holding of < 2 years, bonds may lose value depending on current interest rate). I said 2 years, because now FED raises interest rate very slowly, so there's no way that interest rates may rise > 1% in any given year. Also long term direction for interest rates is downhill, so you will most likely be always in black, except when you are in it short term for < 2 years. (This has been proved wrong, as FED raised rates about 4% in 2022).

Bond prices fluctuate, so even though you may be collecting monthly dividend, you may still lose money. If the bond price falls by more than your dividend amount, then you are in red (if you have to sell it at that time). The longer you hold bond, less the likely hood that you will lose money. Usually, bonds move in opposite direction to stock market, so if stock market falls hard, bond prices may rise (irrespective of interest rate direction), so you may be able to break even with cash, but not always guaranteed. Bond prices vary mostly based on FED funds rate. If you hold any bond to maturity, then you will never lose money on principle. Be aware of the risk of losing money on bond, no matter how much you collect in interest.

We'll talk about the 2 kinds of bonds: Government Bonds and Corporate Bonds

 

1. Government Bonds:

We may buy bonds issued by the government directly from their treasury website or thru a brokerage account. These bonds are guaranteed by the government, and they can't default (as the govt can print unlimited amount of money). The bonds have been giving very low interest (i.e 10 yr were yielding 1.5% and 30 year were yielding 2%, with shorter maturity ones yielding close to zero as of Dec 2021). However as of May 2022, tables have turned, and some government bonds are paying more in interest in a year that what corporate bonds are going to pay in multiple years.

When we say Govt bonds, we mean Treasury securities. These treasury securities can be bought via your treasury Direct account. They can also be bought via your brokerage accounts in secondary market or in primary market (i.e new issues) via participating in auction held by Treasury department. Treasury securities consist of Treasury Bills, Treasury notes, Treasury bonds, TIPS (Treasury Inflation protected securities) and Savings Bonds. Below is the link with more details:

Treasury Direct (TD): https://www.treasurydirect.gov/indiv/research/indepth/indepth.htm

Treasury Securities are classified in these 3 categories depending on how long they take to mature. We use these 3 terms interchangeably on this website, so be mindful of that.

  • T-Bills: Known as Treasury bills, they refer to Treasury securities having shortest maturity term. They mature in anywhere from 1 month to 1 year. Terms are 4, 8, 13, 26 and 52 weeks. They don't pay interest, but instead sell at a discount to par value. So, their coupon yield is 0% (0.0% rate is what is listed on the Bill), but you buy a $100 bill for may be $99. Then on maturity you get full $100, implying $1 income, which you can think of as interest.
  • T-notes: Known as Treasury notes, they refer to Treasury securities having medium maturity term. They mature in anywhere from 2 years to 10 years. Terms are 2, 3, 5, 7 and 10 years.We buy them at par value, and redeem them at par value (unlike T-Bills). They have a interest rate or coupon rate written on the issue. Based on that rate, interest payments are made every 6 months. 
  • T-Bonds: Known as Treasury Bonds, they refer to Treasury securities having longest maturity term. They mature in 20 years or 30 years. They are just like T-notes, where interest payments are made every 6 months. T-Bonds usually have higher interest rates than T-notes since you tie up your money for a longer term.

All of these 3 kinds of Treasury securities as well as TIPS have been useless for the past 15 years (i.e 2008-2022) as they have given close to 0% returns. As of Sept 2022, these Treasury securities have suddenly become very popular because of 4%+ interest rates on maturity < 1 yr. Here's few such offerings:

 

Savings Bonds:

Apart from T-bonds mentioned above, there are another kind of Bonds known as Savings bond. Savings bonds have suddenly become even more popular in this low interest rate environment, as inflation has picked up (Savings bonds rates are tied to inflation). Here are the 3 saving bonds that are sold by the treasury: EE Savings bonds, I Savings bond and H Savings bond (H savings bond have been discontinued). These are the tidbits about savings bond to keep in mind:

  • All savings bonds are issued for a maximum of 30 years and earn interest for 30 years unless you cash them out before maturity. You can cash them out after 1 year (Before 1 year, you can't cash them out, no matter what). But if you cash them before 5 years, you lose the last 3 months' interest. (For example, if you cash an EE bond after 18 months, you get the first 15 months of interest.). If you cash them out after 5 years, you pay no penalty.
  • One other caveat with savings bonds is that only $10,000 each calendar year for each Social Security Number (including kids, no age limit) is allowed for each type of savings bond. There are some exceptions, which we'll look at later (i.e Buying $10K more per account holder as gift for someone else). So, it's scattered money that you will have to keep tab of, else your family may never see this money once you are gone from this world. For a family of 4 with 2 adults and 2 kids, you could buy a maximum of $40K of savings bonds every year. You could also buy extra $40K as gifts that you can gift to each other (money doesn't need to be gifted to outsider).
  • Other problem is that the the bank account that you use to transact on TD website is not easy to change (once you register that bank account). So, you can't close that bank account ever. If for some reason, the bank is gone, then it's a hassle to setup a new bank, as there's no way to verify your identity (as everything is handled online). I've read comments that TD is making it easier to change yourbank accounts, so hopefully this issue will be resolved.
  • You save state income taxes on these, but NOT federal income taxes. Since state taxes are usually low to start with, there's not too much in tax savings here.

These are the 2 kinds of savings bonds:

1. EE Savings bonds: EE bonds earns the same rate of interest (a fixed rate) for up to 30 years. When you buy the bond, you know what rate it will earn for at least the first 20 years. Treasury announces the rate for  new bonds each May 1 and November 1. For the last 15 years (from 2008-2022), rates have been close to 0%. Regardless of the rate, at 20 years the bond will be worth twice what you pay for it. If you keep the bond that long, Treasury will make a one-time adjustment then to fulfill this guarantee. What this implies is that you will get at least 3.6% APR for the 1st 20 years. If you hold EE bonds for < 20 years, you get nothing, as interest rates are 0.1%. EE Bonds may be an alternative to 20 year CD. EE bonds are not recommended as the holding period is for ever, and you can get > 3.6% return in stock market in 20 years. Here are the interest rates on EE bonds (click on link on this webpage that shows rates since 2005):

https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms.htm

2. I Savings Bonds: I bonds earns interest based on combining a fixed rate and an inflation rate. Fixed rate stays the same for the life of the bond but the inflation rate is set twice a year, and applied to all the I Bonds. For the last 15 years (from 2008-2022), fixed rate of these bonds have been close to 0%. However, the inflation rate has shot up starting 2021, and averaged about 5%-8% from 2021-2022. This has made I bonds very attractive, as you can close the I bonds after a year, lose 3 months of interest and still get more money in interest than what any bank will ever pay you. Historical rates are provided for I savings bond on TD link above. As you can see that since 2008, fixed rate has been 0 (or very close to 0), and variable rate (i.e inflation rate) has been  1%-2% per year. Even though fixed rate can't go below 0, variable rate can go -ve, implying your return may even go -ve. Historical rates on I bonds are provided on link below (scroll to the rates section below): 

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

As can be seen, since 2003, fixed rates on I-bonds have been < 1% for 6 months (mostly 0%). Variable rates has mostly been under 2% for 6 months (4% yearly rate when considered for a year). So, annualized rates on these I bonds have mostly been < 5% annualized. The last time it was 5% was in 2008, and then from 2009-2020, it has mostly been < 2%. What we are seeing from 2021 onwards is an anamoly, so make your long term investment plans based on this. I Savings bonds are short term investment to be kept for a couple of years at most.

UPDATE Nov 2022: Fixed rates on I bonds issued starting from Nov 1, 2022 has gone to 0.4%. That means all bonds issued since Nov 1, 2022 will now have a fixed rate of 0.4% instead of 0%. This applies to only bonds issued after Nov 1, 2022 and will remain tied to the I-Bond for the life of the I-Bond. TD may decide to lower this rate any time, but that will affect only new issues from that point on, and NOT existing I-Bonds that had already been issued. This is a nice bump.

There's an article explaining this here: https://www.doctorofcredit.com/treasury-direct-adds-40-fixed-rate-to-i-bonds-on-top-of-6-48/

Here's few links to the deal for I bonds:

Conclusion: None of these savings bonds are for long term investment. EE bonds are useless, and I bonds can be kept for anywhere between 1-5 years depending on the inflation rate. Only if you get > 5% annualized rates on these is when you should get into the I bonds. As soon as the rates go below < 2% annualized, get out of these. You should think of it as a short term CD (1 yr to 5 yr term deposit CD) and nothing more. Pay the small penalty when you cash out in < 5 years, and you may still come ahead. When people say savings bonds, they usually mean I Savings bond (and NOT EE savings bonds)

 

2. Corporate Bonds:

Just like government bonds, we can buy corporate bonds. These are bonds issued by private companies. Since the risk of default is higher in these, they pay you a higher interest rate than similar maturity Government bonds. So to reduce the risk of default, instead of buying bond from one company, we can spread our money and buy bonds from several different companies. This diversification works well, similar to how we diversify in stocks. Just like we have stocks ETF and mutual fund, we have equivalent Bond ETF and Bond Mutual Funds (MF). So, we don't have to go and buy bonds from 100 different companies, ETF and MF do that for us.

Bond ETF or bond mutual fund pools in bonds from multiple companies to reduce risk of default. These bond fund may invest in any kind of debt security. Even though we say corporate bond, these bonds may invest in corporate debt, municipal debt, government debt or foreign debt. There are mixed bonds which invest in both corporate bonds and Treasury bonds, while there are Treasury bonds which invest exclusively in treasuries and Corporate bonds which invest exclusively in Treasuries. There are bond ETF/MF which invest in long term debt (i.e bonds maturing in 10 years or more), while there are bond ETF/MF which invest only in short term debt (i.e bonds maturing in a couple of months). All these Bond funds offer different yield depending on mix of bonds and their maturity duration. Safest to buy bonds which invest in very short term debt, as fluctuation in price of Bond is very low (though yield is also low to start with). Anyway, we are just trying to get something better than cash here.

We'll not discuss Bond Mutual Fund (MF), as Bond MF have same drawbacks as Stock mutual fund (i.e MF almost always have higher expense ratio compared to ETF and can only be bought/sold at the end of the day). ETF are always desirable over MF. Below we'll discuss 3 kind of Bond ETF: Long Term ETF, Short term ETF and Ultra short term ETF.

Long term Bond ETF:

These are bonds which hold their securities any where from 5 years to 30 years. Below are few most popular long term bond ETF. All these ETF are mixed bond ETF meaning they invest in Corporate as well as Government debt.

1. iShares Core US Aggregate Bond ETF (AGG):

This ETF offers broad-based exposure to investment grade U.S. bonds. It's number 1 bond ETF and very liquid and has AUM of around $80B as of Dec, 2021. It's expense ratio is only 0.04%. It offers a dividend yield of 2% as of Dec 2021.

2. Vanguard Total Bond Market ETF (BND):

This popular ETF offers exposure to entire investment grade bond market in a single ticker, with holdings in T-Bills, corporates, MBS, and agency bonds. While it holds securities of all maturity lengths, it is heavily weighted towards the short end of the curve. It's number 2 bond ETF and very liquid and has same AUM as those of AGG. It's expense ratio is same as AGG at 0.04%. It offers a slightly higher dividend yield of > 2% as of Dec 2021.

3. BNY Mellon Core Bond ETF (BKAG):

This ETF was introduced recently in 2020, and tries to mimick AGG. Best part is that it has 0 expense ratio, which in unheard of in Bond ETF world. However, it's spread is higher at 3 cents, since it has AUM of only $200M. It's dividend is also lower (at 1.3% as of Dec 2021) than those of AGG and BND, not sure why?

Personally, I would just go with either Vanguard ETF (BND) or BKAG for long term. However, as stated earlier, long term Bond ETF are just not worth investing.

UPDATE Apr 30, 2022: As of today, corporate bonds (i.e Bond ETF AGG) have lost about 15% of the value from their peak. They were yielding about 1.5% at their peak, meaning people who bought bonds a year back, are getting 0% interest on their bonds (This is due to the fact that $15 that they are going to collect in interest over next 10 years, is negated by $15 that the value of bond itself has come down by). So, when you cash out these bonds in less than 10 years, you get much less than what you paid ($85 in principal + $1-$10 in interest), implying -ve return. Of course, if you hold it for 10 years or more, bond prices would recover and you will be made whole. Anyone who bought these long term Bond ETF in the last 10 years has lost money compared to cash. So, only time to buy these long term bond ETF is when they yield > 3%. Anything below that is too risky.

 

Short term Bond ETF:

These are bond ETF which hold their securities from a year to < 5 years. Although, the risk of losing money due to loss in bond price is still high here, though not as high as Long term Bond ETF. I wouldn't consider these ETF at all, as they don't give any advantage over stocks, and are more nuisance. I've listed 1 example each of Corporate Bond ETF as well as Govt Bond ETF, just for completeness.

1. Vanguard Short-Term Treasury ETF (VGSH):  This invests in 1-3 yr Treasury bonds. Expense ratio=0.04%. Yield was pretty low as of start of 2022, but have started moving up as FED rates have gone up.

2. Vanguard Short-Term Corporate Bond ETF (VCSH): This invests in short term corporate bonds. Expense ratio=0.04%. Yield is higher than similar Treasury bonds.

 

Ultra Short term Bond ETF:

Below are few largest and popular ultra short term bond ETF. These are bonds which hold their securities for less than a year. So, the risk of losing money due to loss in bond price is very low, especially if you hold it closer to the maturity term of their holdings (which is less than a year). Only downside here is that short term interest rates have been close to 0 for last 10 years (from 2010 to 2020), so these ETF have given close to 0% return. However, when short term interest rates are > 1%, it's advisable to park your brokerage cash into these ultra short term ETF. They give you better yield than what bank accounts give you.

There are 31 such ETF listed below. Some of them are exclusively invested in US treasuries (most safe), while few are invested in corporate bonds too.

https://www.etf.com/channels/ultra-short-term-etfs

I've listed 1 example each of Govt Bond ETF as well as Corporate Bond ETF.with very low expense ratio:

1. iShares 0-3 Month Treasury Bond ETF (SGOV):

This primarily invests in 0-3 month Treasury bills. So, it's return is lower as Treasury bills have lowest interest rate at any given time. It's NAV is around $100. It's expense ratio is lowest at 0.05%. It pays out dividend every month around 1st of the month.

Here's SGOV details directly from ishares website: https://www.ishares.com/us/products/314116/ishares-0-3-month-treasury-bond-etf

If you click on detailed holdings, it brings up an excel sheet. That shows only 12 holdings, 25% of which is in money market, remaining in 1-3 month treasury (as of Aug 2022, Treasuries are maturing in Aug, Sept and Oct 2022). T-Bills show 0.0% coupon rate as expected (see discussion above).

Dividend schedule for this is shown on far left of the page under "distributions" (click on "view full table"). You'll notice that dividend has been 0.5 cents every month that the Fed had interest rates tied to 0%. So this fund was able to get you 0.05% yield every year on avg, which is as close to absolute 0 as it can get.

Below is the table of what T-bills were yielding each month of 2022, and what was the yield that SGOV gave for that month. SGOV yield for a given month was close to the avg of 1 month T-bill for current month, 2 month T-bill yield for previous month, and 3 month T-Bill yield for 2 months back. This is as expected, since most 2 and 3 month T-Bills are from prior months and have older rates. Also, since 25% of the fund money is in lower yielding money market, yield goes even lower for SGOV. However NAV of SGOV has held pretty well, since the fund continuously rolls into newer T-Bills, as old ones keep on maturing. We should expect to see SGOV yielding close to 3% by end of 2022.

SGOV Yield for 2022:

Month/Maturity 1 month (avg) 2 month (avg) 3 month (avg) SGOV dividend/yield
Jan 2022  0.05% 0.05% 0.15%  $0.002 (0.02%)
Feb 2022  0.05% 0.2% 0.3%  $0.008 (0.1%)
Mar 2022  0.2% 0.3% 0.4%  $0.018 (0.2%)
Apr 2022  0.3% 0.5% 0.7%  $0.025 (0.3%)
May 2022  0.5% 0.7% 1.0%  $0.041 (0.5%)
June 2022  1.1% 1.4% 1.6%  $0.069 (0.8%)
July 2022  1.8% 2.2% 2.4%  $0.116 (1.4%)
Aug 2022  2.2% 2.5% 2.7%  $0.168 (2.0%)
Sept 2022  2.6% 3.0% 3.2%  $0.157 (1.9%)
Oct 2022  3.4% 3.6% 3.8%  $0.241 (2.9%)
Nov 2022  3.9% 4.1% 4.3%  $0.283 (3.4%)
Dec 2022  3.9% 4.3% 4.4%  $0.327 (3.9%)

For year 2022, Total dividend paid was ~$1.45 which amounted to 1.5% dividend yield. The last dividend was paid on 15th Dec, 2022, so 15 days of interest will be paid in 2023. Avg Treasury yield was about 1.7% for 2 month T-bills, so SGOV came close to what we would have gotten by buying T-Bills directly.

For 2023, Total dividend paid for 6 months (until June 2023) is $2.27 for first 6 months (avg Treasury yield was 4.8% for 2 month T-Bill for 1st 6 months), and $2.61 for last 6 months (avg Treasury yield was 5.5% for 2 month T-Bill for last 6 months). We get extra 15 days of interest from 2022 in Feb, 2023, but also lost 15 days of interest for Dec 2023. Assuming they cancel out, total interest payment was $4.88. Based on 2 month T-Bill, we should have gotten $2.4 for 1st 6 months, and $2.75 for last 6 months, but SGOV underpaid during both of these periods. So, SGOV holds up well with T-Bill interest rates, though coming in lower at 4.9% instead of 5.1% interest rate. We may lose a little in principal (avg 0.2% or 20 cents depending on interest rate direction. SGOV has varied from $100 to $100.20 just after paying the dividend, so assuming it goes back to $100, you will lose 20 cents). So, better to go with SGOV as you end up getting close to T-Bill rates, instead of going with Money Market Mutual Fund (explained below).

 

2. BlackRock Ultra Short-Term Bond ETF (ICSH):

This primarily invests in broad market investment grade corporate bonds. It's NAV is around $50. Expense ratio is low at 0.08%. It's 5 year return has been 1.5%. It pays out dividend every month. Short term treasury are yielding around 2% as of June 2022, but ICSH paid only 5 cents in dividend for June 2022, implying a yield of 1.2%. Since, ICSH invests in Corporate bonds, we expect to see higher yields than treasury bonds. So, ICSH yield is lot lower than similar term treasury yield. We'll need to watch dividend payout for July, Aug and Sept 2022. Dividend should be at least 10 cents for each of these months with NAV at $50, that will imply we are getting around 2.5% dividend as expected.

Here's ICSH details directly from ishares website: https://www.ishares.com/us/products/258806/ishares-liquidity-income-etf

If you click on detailed holdings, it brings up an excel sheet. That shows about 450 holdings (the webpage lists only 234 holdings though). 60% of the holdings have maturity < 3 months (30% of the holdings with maturity < 7 days), but 15% of the holdings have maturity > 1 yr. Weighted avg maturity is still high at 8 months. That puts the principal at risk, and this is why we see the price of this fund went from $50.50 in Oct 2021 to about $50 in Apr 2022, implying a loss of 1% loss in bond price. That wouldn't have happened if all the holdings had maturity of < 6 months (as with SGOV). Maturity wise, ICSH holdings are kind of messed up, as they load on real short maturity and also load up on real long maturity. That means you get the disadvantage of lowest interest rate (for real short maturity holdings), along with the principal risk of these very long maturity holdings. So, it's guaranteed to lose money either in interest loss or in principal loss.

Dividend schedule for this is shown on far left of the page under "distributions" (click on "view full table"). You'll notice that dividend has been 1-2 cents every month that the Fed had interest rates tied to 0%. So this fund was still able to get you 0.5% yield every year on avg, which is good considering the fact that SGOV was yielding absolute 0.

Conclusion: Comparing all these ETF, only ultra short term ETF (with avg maturity < 12 months) make sense. Among the 2 of such ETF listed above, SGOV has lower expense ratio and lower maturity than ICSH. SGOV guarantees almost no principal loss due to bond price fluctuation. We do get a lower yield with SGOV than with ICSH, but it's lot better than what banks and CD pay you when short term interest rates are > 1%.  Also, we are able to get out of SGOV at any time, while ICSH may involve some loss if we try to get out in < 1 year. Also, ICSH is corporate bond, so it should be at least 1% more in interest rate than SGOV, but we don't see that. Considering all of this, SGOV is a preferred investment over ICSH when Fed fund rates > 1%. Below that rate, putting most of the money in high yielding kasasa bank accounts makes sense. I would just stay away from ICSH (not worth investing).

 

 

B. Money Market fund (MMF):

Apart from bonds, we also have money funds, which is like a short term loan to a company. These money funds never lose money (principle is safe) in practice, though theoretically they could lose money. These money market funds have a NAV or price of $1. You are essentially guaranteed that price will always remain a dollar (i.e you will never lose money). However, the dividend that you get in these will be close to 0 (when Fed funds rate are 0%), as their interest rates are tied to short term (1 month - 6 month) treasury rates. Also expense ratio is high, which almost eats into all the dividend. So, you will never make any money when Fed fund rates are < 1%. You are better off putting that money as cash in some other bank account (Tmobile account that earns you 1% with no limits, see in "bank account" section), and then transfer the money to brokerage account, only when you need it. However, when short term interest rates are high (i.e > 2%), then it makes sense to put money in these money market funds. They can be bought at any brokerage forms.

I'm listing below couple of money market funds for completeness. These are the funds issued by various brokerage firms. Different brokerage firms have their own money market funds, and you can only buy them at their own brokerage firm commission free. To buy at other brokerage firms, you have to pay an extra fee. For ex, if you try to buy a schwab MMF at Vanguard, then Schwab may charge you $50-$100 for buying it. So, first try to find out which MMF are offered by your brokerage, which of them give the highest interest rate and if the interest rate is close to what you get in Bond or CD, then you may consider these.

  1. Prime money funds: schwab value advantage - investor shares (SWVXX) = Offered at Schwab only. expense ratio=0.34%, 10 year yearly return=0.5% (for 2021, yearly return is 0.03%)
  2. Prime money funds: schwab advantage - ultra shares (SNAXX) = Offered at Schwab only. expense ratio=0.19% 10 yr yearly return=0.6% (for 2021, yearly return is 0.03%). However, minimum investment of $1M required.
  3. Vanguard Federal Money Market Fund (VMFXX) = expense ratio=0.11%, 10 yr return is low. Avg maturity period of holdings is 2 months, so you get yield similar to 3 month Treasury bills.

Conclusion:

You can see that 10 year return for these money market funds can't even get to 1% from 2011 to 2021, when short term interest rates were close to 0. So, MMF are useless most of the times (as federal fund rates would remain close to 0 most of the times). I would recommend buying Ultra short term ETF over these Money Market funds, as those ETF have lower expense and higher yield. There's no additional advantage that these money funds offer over similar bond ETF. The only guarantee that MMF offer is their NAV value which remains tied to $1 and never fluctuates. But for this guarantee, they take a lot of money from you by giving you much lower interest rate. MMF are advertised heavily by Brokerage firms, as it's cash cow for them (with such high expense ratio). I would just buy Bond ETF (Such as SGOV), and stay away from MMF.

 

 

C. Brokered Certificate of Deposit (CD):

We now come to the most interesting part of fixed income investing. Apart from bonds and MMF, you can also buy CD at your brokerage firms. These generally give you rates competitive to Bonds and MMF. These CDs are not issued by the brokerage firm, but instead other banks, credit unions, companies, etc put their CDs on sale at these brokerage firms. These CDs are protected by same FDIC or similar insurance that is offered on CDs sold by banks/CU. These are called Brokered CDs as the brokerage firm is just acting as a middle man to connect you to a a seller selling these CDs. These CD generally have higher interest rates than what Banks give you for similar term CD on their own website.

It's also very easy to buy or sell CDs on a click of button (similar to buying/selling of stocks). Also, no worries of CD going beyond your maturity date, as money will automatically be moved in your brokerage account, once CD matures (unless you have it set on auto renewal). There is no paperwork to fill either. Other advantage is that all your money is one place and no headache to keep records of your CDs at other banks. Brokered CDs are offered in terms ranging from 1 month to 30 years, and there are thousands of CDs competing for your money. All of these CDs are the ones issued by banks/CU, but they are sold here, since brokerage firms give these CDs a much bigger market than they can otherwise access. Brokerage firms themselves don't make much, if any at all, money on these CDs (they do make tons of money on their MMF though).

Broker CDs not only give you higher interest rate, but they also allow you to cash it out prematurely (provided CD has the option of being sellable in secondary market). You can buy/sell CD on the broker's website anytime you want, provided the trading market is open. You may lose some money in the process as the CD price in the secondary market may be higher or lower than you paid for it. Depends on the interest rate at that time. But the amount of money you may lose is very small compared to what you may lose in a bank.

One of the downsides of Brokered CDs is that CD don't get opened immediately. You lose at least 1-2 weeks of interest, before the trade settles and interest starts accruing on CD. So, on a 1 year CD, you lose about 5% of interest amount. Due to this, it's wise to open brokered CDs for > 6 months only.

I've used Schwab and Ameritrade brokerage accounts for buying CD and Bonds, and I'm just impressed with the ease and the much higher interest that you get on those CD. As of September 2022, a lot of Brokered CD are offering rates > 4% for 1 year CD. Even 1 month CD are offering over 3% rates (As of Jan 2023, 1 month CD have rates > 4%. As of Aug 2023, 1 month CD have rates > 5%). You can never get anywhere close to these rates with a regular Bank/CU CD. For best CD rates, head to section on "Best CD accounts".

 

 

Buying Bonds / CD / MMF at Brokerage Firms:

As stated earlier,  all of these Bonds, MMF and CD can be bought via your brokerage account by click of  button. They can also be sold very easily too. There are no fees charged by the brokerage firms, and you don't need to call or talk to anyone over the phone or send any paperwork. It's similar to buying/selling of stocks. There's usually a link to "Bonds, CD or other similar securities" on your brokerage website. That will show various kinds of Bonds, MMF, CD available for purchase. Just call and ask your brokerage firm and they will gladly guide you thru the process.

We'll talk in short about how to buy these:

  1. Bonds: Bonds are of 2 types. Govt bonds and corporate bond.
    1. Govt Bonds: These may be bought directly online at treasurydirect website, but it's always better to buy it via your Brokerage firm (not the savings bonds, just T-bills, T-notes and T-bonds. (Savings bonds can only be bought at TD website). By buying it via Brokerage firm, you retain the ability to sell them at any point whereas positions purchased in a treasurydirect account can only be held to maturity or transferred to a brokerage firm. You can purchase all treasuries thru brokerage firms such as Schwab, Fidelity, etrade etc. These treasuries may be bought in primary market as well as in secondary market.
      1. Primary market: Here we are buying bonds directly from the treasury by participating in the auction. Most brokerage firms allow you to participate in the auction, and buy treasuries this way. They may charge a commission though for providing this privilege.
        1. This is a link that shows how to buy Bill/notes/bonds offered by Treasury during the auction directly from various Brokerage. The author says that it saves you money on buy and sell as secondary markets will always have some spread. But then you are tied to the treasury until it matures. You may not sell it in secondary market (see next section)
          1. Link: https://thefinancebuff.com/treasury-bills-cd-money-market.html
      2. Secondary market: Here we are buying/selling treasuries from other people which were ultimately bought in the primary market. Here market participants decide the price of bonds, and they are very close to fair price based on interest rate in effect at that time. Most of the brokerage firms don't charge any fees or commission for buying/selling in secondary market. So, I would just buy/sell in secondary market as there's no difference in the return. The small disadvantage of buying/selling in secondary market is the spread that you have to pay. It's usually a cent or two for each way transaction.
    2. Corporate Bonds: You may purchase corporate bonds too similar to Govt bonds. They may be bought/sold in Primary market or secondary market. There are no fees whatsoever to purchase these thru your brokerage firm. And you can purchase treasuries in the secondary market (those that were previously sold in an auction) as well as brokered bank CD's which have finally caught up to treasury rates @ intermediate maturities. And  Added advantage is that all your money is at one place.
    3. ETF bonds (Government bonds / Corporate bonds): ETF bonds allow us to diversify amongst different kinds of bonds, so ETF bonds are preferred. They can be bought/sold just like stocks. ETF are of all kinds of bonds (govt bond, corporate bonds, municipal bonds, etc)
  2. MMF: MMF can be bought/sold just like stocks. However, MMF are speciifc to a brokerage firm, and if you try to buy/sell MMF of a different brokerage, you have to pay commission. So, not worth buying MMF.
  3. Brokered CD: CD can also be bought/sold just like bonds. CD can be primary CD or Secondary CD.
    1. Primary market: Just like bonds being sold in primary market, CD also get bought by directly buying it from the issuer of the CD. Usually CD issuers are banks, Credit Union and private companies.
    2. Secondary market: Similar to bonds, CDs may be bought/sold in secondary market. Look at the details of the CD which shows the original price, current price, current yield to maturity, etc. To keep it simple, I just buy it from Primary market.

 

 

Conclusion:

Now knowing all about Bonds, MMF and CD, it's time to decide which one is best. We already know the answer to this. When Fed fund rates are close to 0, all these will give you 0% interest, so at such times, keep your money in Kasasa Bank accounts or a Tmobile bank account (see in Bank section). When Fed fund rates are > 1%, keep your money in SGOV ETF. You may also keep your money in short term brokered CDs, as these will most likely give you interest rates little higher than what SGOV might be offering you. Remember, that investing in Bonds, MMF and CDs is just short term. For long term, you put your money in the stock market Ponzi scheme !!

 

 

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